UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from ________________ to ________________
Commission File Number:
MARIJUANA COMPANY OF AMERICA, INC.
(Exact Name of Registrant as Specified in its Charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act: None
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
The number of shares of the issuer’s common stock, no par value per share, outstanding at August 22, 2022 was .
Table of Contents
| Page No. | ||
| PART I. FINANCIAL INFORMATION | 4 | |
| Item 1. | Financial Statements | |
| Condensed Consolidated Balance Sheets as of June 30, 2022 (Unaudited) and December 31, 2021 (Audited) | 4 | |
| Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021 (Unaudited) | 5 | |
| Condensed Consolidated Statements of Stockholders’ Deficit for the Six Months Ended June 30, 2022 and 2021 (Unaudited) | 6 | |
| Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (Unaudited) | 8 | |
| Notes to the Condensed Consolidated Financial Statements (Unaudited) | 9 | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 33 |
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 41 |
| Item 4. | Controls and Procedures | 41 |
| PART II. OTHER INFORMATION | 42 | |
| Item 1. | Legal Proceedings | 42 |
| Item 1A. | Risk Factors | 43 |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 43 |
| Item 3. | Defaults Upon Senior Securities | 43 |
| Item 4. | Mine Safety Disclosure | 43 |
| Item 5. | Other Information | 43 |
| Item 6. | Exhibits | 43 |
| Signatures | 44 | |
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934 as amended (the “Exchange Act”). Any statements in this Quarterly Report on Form 10-Q about our expectations, beliefs, plans, objectives, assumptions or future events or performance are not historical facts and are forward-looking statements. These statements are often, but not always, made through the use of words or phrases such as “believe,” “will,” “expect,” “anticipate,” “estimate,” “intend,” “plan” and “would.” For example, statements concerning financial condition, possible or assumed future results of operations, growth opportunities, industry ranking, plans and objectives of management, markets for our common shares and future management and organizational structure are all forward-looking statements. Forward-looking statements are not guarantees of performance. They involve known and unknown risks, uncertainties and assumptions that may cause actual results, levels of activity, performance or achievements to differ materially from any results, levels of activity, performance or achievements expressed or implied by any forward-looking statement.
Any forward-looking statements are qualified in their entirety by reference to the risk factors discussed throughout our most recent Annual Report on Form 10-K as may be amended, supplemented or superseded from time to time by other reports we file with the U.S. Securities and Exchange Commission (the “SEC”). You should read this Quarterly Report on Form 10-Q and the documents that we reference herein and have filed as exhibits to the reports we file with the SEC completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this Quarterly Report on Form 10-Q is accurate as of the date hereof. Because the risk factors in our SEC reports could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this Quarterly Report on Form 10-Q, and particularly our forward-looking statements, by these cautionary statements.
| 3 |
PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
| MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES | ||||||||
| CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
| Unaudited | Audited | |||||||
| June 30, 2022 | Dec 31, 2021 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory | ||||||||
| Prepaid Insurance | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other assets: | ||||||||
| Long-term Investments | ||||||||
| Goodwill | ||||||||
| Intangible assets, net | ||||||||
| Security deposit | ||||||||
| Total assets | ||||||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | ||||||||
| Accrued compensation | ||||||||
| Accrued liabilities | ||||||||
| Notes payable, related parties | ||||||||
| Convertible notes payable, net of debt discount of $ | ||||||||
| Contingent Liability - Acquisition | ||||||||
| Subscriptions payable | ||||||||
| Derivative liability | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders' (deficit:) equity: | ||||||||
| Preferred stock, $ par value, shares authorized | ||||||||
| Class A preferred stock, $ par value, shares designated, shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Class B preferred stock, $ par value, shares designated, shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Common stock, par value; shares authorized; and shares issued and outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Common stock to be issued, | ||||||||
| Treasury Stock | ( | ) | ||||||
| Accumulated other Comprehensive Income (loss) | ( | ) | ( | ) | ||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders' (deficit) equity | ( | ) | ||||||
| Total liabilities and stockholders' (deficit) equity | $ | $ | ||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 4 |
| MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES | ||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 | ||||||||||||||||
| UNAUDITED | ||||||||||||||||
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| REVENUES: | ||||||||||||||||
| Sales | $ | $ | $ | $ | ||||||||||||
| Total Revenues | ||||||||||||||||
| Cost of sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| OPERATING EXPENSES: | ||||||||||||||||
| Depreciation and amortization | ||||||||||||||||
| Selling and marketing | ||||||||||||||||
| Payroll and related | ||||||||||||||||
| Stock-based compensation | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Net loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| OTHER INCOME (EXPENSES): | ||||||||||||||||
| Interest expense, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss on equity investment | ( | ) | ( | ) | ||||||||||||
| Impairment loss on Acquisition | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on change in fair value of derivative liabilities | ( | ) | ( | ) | ||||||||||||
| Gain (loss) on trading securities | ( | ) | ||||||||||||||
| (Loss) gain on settlement of debt | ( | ) | ( | ) | ( | ) | ||||||||||
| Total other income (expense) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes (benefit) | ||||||||||||||||
| NET LOSS | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Foreign currency Translation Adjustment | ||||||||||||||||
| Comprehensive Income | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per common share, basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding, basic and diluted | ||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 5 |
| ||||||||||||||||||||||||||||||||||||||||||||||||
| MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES | ||||||||||||||||||||||||||||||||||||||||||||||||
| CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT | ||||||||||||||||||||||||||||||||||||||||||||||||
| FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021 | ||||||||||||||||||||||||||||||||||||||||||||||||
| UNAUDITED | ||||||||||||||||||||||||||||||||||||||||||||||||
| Class A Preferred Stock | Class B Preferred Stock | Common Stock | Treasury Stock | Common Stock to be issued | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Amount | Shares | Amount | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of liabilities | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for settlement of liabilities - related parties | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in exchange for exercise of warrants on a cashless basis | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common shares | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Common shares issued in settlement of legal case | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Common shares cancelled by officer | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for investments | ||||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from warrants issued with convertible notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for acquisition of business | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | ||||||||||||||||||||||||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 6 |
| Class A Preferred Stock | Class B Preferred Stock | Common Stock | Treasury Stock | Common Stock to be issued | Accumulated | Other Comprehensive | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Amount | Shares | Amount | Deficit | Loss | Total | |||||||||||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||
| Common stock issued for services rendered | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued in settlement of convertible notes payable and accrued interest | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock for deferred finance costs | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Sale of common stock | — | — | ||||||||||||||||||||||||||||||||||||||||||||||
| Treasury stock purchase | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
| Common shares cancelled by officer | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||
| Reclassification of derivative liabilities to common stock | ||||||||||||||||||||||||||||||||||||||||||||||||
| Debt discount from warrants issued with convertible notes payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for contingent consideration | ||||||||||||||||||||||||||||||||||||||||||||||||
| Common stock issued for subscriptions payable | ||||||||||||||||||||||||||||||||||||||||||||||||
| Net Loss | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||
See the accompanying notes to these unaudited condensed consolidated financial statements
| 7 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND 2021
UNAUDITED
| 2022 | 2021 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Income (Loss) | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Depreciation and amortization | ||||||||
| Bad debt expense | ||||||||
| Loss on equity investment | ||||||||
| Loss on VBF acquisition | ||||||||
| Loss (Gain) on change in fair value of derivative liability | ||||||||
| Interest expense recognized for the excess of fair value of derivative liability over net book value of notes payable at issuance | ||||||||
| Stock-based compensation | ||||||||
| Unrealized (Gain) Loss on trading securities | ( | ) | ||||||
| Loss on settlement of liabilities | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued expenses and other current liabilities | ( | ) | ||||||
| Right-of-use assets | ||||||||
| Right-of-use liabilities | ( | ) | ||||||
| Net cash (used in) operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ( | ) | ||||
| Payment to establish joint venture | ( | ) | ||||||
| Acquisition of business | ( | ) | ||||||
| Net cash (used in) investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of notes payable | ||||||||
| Repayments of notes payable | ( | ) | ( | ) | ||||
| Repayments to related parties | ( | ) | ||||||
| Repurchase of common stock | ( | ) | ||||||
| Proceeds from sale of common stock | ||||||||
| Net cash provided by financing activities | ||||||||
| Foreign exchange impact on cash | ||||||||
| Net (decrease) increase in cash | ( | ) | ||||||
| Cash at beginning of period | ||||||||
| Cash at end of period | $ | $ | ||||||
| — | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non cash financing activities: | ||||||||
| Common stock issued in settlement of convertible notes payable | $ | $ | ||||||
| Reclassification of derivative liabilities to additional paid-in capital | $ | $ | ||||||
| Common stock issued for subscriptions payables | $ | $ | ||||||
| Common stock issued to settle liabilities | $ | $ | ||||||
| Common stock issued for acquisition of business | $ | $ | ||||||
| Debt discount from issuance of warrants | $ | $ | ||||||
| Common stock issued for deferred finance costs | $ | $ |
See the accompanying notes to these unaudited condensed consolidated financial statements
| 8 |
MARIJUANA COMPANY OF AMERICA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(unaudited)
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Marijuana Company of America, Inc. (the
“Company”) was incorporated under the laws of the State of Utah in October 1985 under the name Mormon Mint, Inc. The corporation
was originally a startup company organized to manufacture and market commemorative medallions related to the Church of Jesus Christ of
Latter Day Saints. On January 5, 1999, Bekam Investments, Ltd. acquired one hundred percent of the common shares of the Company and spun
the Company off changing its name Converge Global, Inc. From August 13, 1999 until November 20, 2002, the Company focused on the development
and implementation of Internet web content and e-commerce applications.
In 2015, the Company changed its business model to a marketing and distribution company for medical marijuana. In conjunction with the change, the Company changed its name to Marijuana Company of America, Inc. At the time of the transition in 2015, there were no remaining assets, liabilities or operating activities of the mining business.
On February 1, 2016, the Company formed MCOA CA, Inc., a California corporation as a wholly owned subsidiary to facilitate mergers, acquisitions and the offering of investments or loans to the Company.
On May 3, 2017, the Company formed Hempsmart Limited, a United Kingdom corporation as a wholly owned subsidiary for the purpose of future expansion into the European market.
On August 8, 2017, the Company formed H Smart, Inc., a Delaware corporation as a wholly owned subsidiary for the purpose of operating the hempSMART™ brand.
On January 11, 2021, the Company formed Hempsmart Global, Inc., a Nevada corporation, as a wholly owned subsidiary for the purpose of facilitating the Company’s Latin American joint ventures in Uruguay and Brazil.
On June 29, 2021, the Company acquired 100% of the capital stock of cDistro, Inc., a Nevada corporation, which is now a wholly owned subsidiary of the Company for the purpose of engaging in the distribution of hemp and CBD products to retail outlets in the North American market.
On July 20, 2021, the Company formed Salinas Diversified Ventures, Inc., a California corporation, as a wholly owned subsidiary for the purpose of consummating the asset purchase agreement with VBF Brands, Inc., see Note 6 for additional information.
On July 19, 2022, the Company formed H Smart, Inc., a California corporation, as a wholly owned subsidiary for the purpose of facilitating the sale and distribution of products in California.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries H Smart, Inc., Hempsmart Limited, cDistro, Inc. and MCOA CA, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.
The condensed consolidated balance sheet as of December 31, 2021 has been derived from audited financial statements set forth in the Company’s Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”) on April 16, 2022 (the “Annual Report”). Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022. These condensed consolidated financial statements should be read in conjunction with the audited financial statements for the year ended December 31, 2021.
NOTE 2 - GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The accompanying consolidated financial statements have
been prepared on a going concern basis which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. As shown in the accompanying financial statements, during the six months ended June 30, 2022, the Company
incurred net losses from operations of $1,718,953 and used cash in operations of $
The Company's primary source of operating funds for the six months ended June 30, 2022 was from funds generated from the issuance of convertible and non-convertible debt, and sale of common stock. The Company has experienced net losses from operations since inception, but expects these conditions to improve in 2022 and beyond as it continues to develop its business; however, no assurance can be provided that the Company will not continue to experience losses in the future. The Company has stockholders' deficiencies as of June 30, 2022 and requires additional financing to fund future operations.
| 9 |
The Company’s existence is dependent upon management’s ability to develop profitable operations and to obtain additional funding; however, there can be no assurance that the Company will be successful in developing profitable operations or that it will be able to obtain financing on favorable terms, if at all. The accompanying statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE 3 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Statements
The unaudited condensed consolidated interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Revenue Recognition
For annual reporting periods after December 15, 2017, the Financial Accounting Standards Board (“FASB”) made effective Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers,” to supersede previous revenue recognition guidance under current GAAP. Revenue is now recognized in accordance with FASB Accounting Standards Codification (“ASC”) Topic 606, Revenue Recognition (“ASC Topic 606”). The objective of the guidance is to establish the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. The core principle is to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. Two options were made available for implementation of the standard: the full retrospective approach or modified retrospective approach. The guidance became effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, with early adoption permitted. The Company adopted ASC Topic 606 for its reporting period as of the year ended December 31, 2017, which made its implementation of ASC Topic 606 effective in the first quarter of 2018. The Company decided to implement the modified retrospective transition method to implement ASC Topic 606, with no restatement of the comparative periods presented. Using this transition method, the Company applied the new standards to all new contracts initiated on or after the effective date. The Company also decided to apply this method to any incomplete contracts it determined are subject to ASC Topic 606 prospectively. For the quarter ended June 30, 2022, there were no incomplete contracts. As is more fully discussed below, the Company is of the opinion that none of its contracts for services or products contain significant financing components that require revenue adjustment under ASC Topic 606.
Identification of Our Contracts with Customers
Contracts included in the Company’s application of
ASC Topic 606 for the six months ended June 30, 2022 consisted solely of sales of the Company’s hempSMART™ and cDistro
products. With respect to the Company’s financial accounting, bookkeeping and/or real property management consulting services,
to date no contracts have been entered into, and thus
In accordance with ASC Topic 606, the Company of the opinion that none of its hempSMART™ or cDistro product sales or offered consulting service, each of which are discussed below, have a significant financing component. The Company’s opinion is based upon the transactional basis for its product sales, with revenue recognized upon customer order, payment and shipment. The Company’s evaluation of the length of time between the customer order, payment and shipping is not a significant financing component because shipment occurs the same day as the order is placed and payment made by the customer. The Company’s evaluation of its consulting services is based upon recognizing revenue as the services are performed for a determinable price per hour. The Company only recognizes revenues as incurred and charge billable hours. Because the Company’s hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
| 10 |
Determination of the Price in Our Sales Contracts
The transaction prices in the Company’s sales contract are the amount of consideration the Company expects to be entitled to for transferring promised hempSMART™ and cDistro products. The consideration amount is fixed and not variable. The transaction price is allocated to the identified performance obligations in the contract. These allocated amounts are recognized as revenue when or as the performance obligations are fulfilled, which is concurrently upon receipt of payment. There are no future options for a contract when considering and determining the transaction price. The Company excludes amounts third parties will eventually collect, such as sales tax, when determining the transaction price. Since the timing between receiving consideration and transferring goods or services is immediate, the Company’s sales contract do not have a significant financing component, i.e., recognizing revenue at the amount that reflects the cash payment that the customer would have made at the time the goods or services were transferred to them (cash selling price), rather than significantly before or after the goods or services are provided.
Allocation of the Transaction Price of Our Sales Contracts
The Company’s sales contracts are not considered multi-element arrangements which require the fulfillment of multiple performance obligations. Rather, the Company’s sales contracts include one performance obligation in each contract. As such, from the outset, the Company allocates the total consideration to each performance obligation based on the fixed and determinable standalone selling price, which the Company believes is an accurate representation of what the price is in each transaction.
Recognition of Revenue when the Performance Obligation is Satisfied
A performance obligation is satisfied when or as control of the good or service is transferred to the customer. ASC 606-10-20 defines control as “the ability to direct the use of, and obtain substantially all of the remaining benefits from, the asset.” For performance obligations that are fulfilled at a point in time, revenue is recognized at the fulfillment of the performance obligation. As noted above, the Company’s single performance obligation sales contracts are singularly related to its promise to provide the hempSMART™ and cDistro products to the customer upon receipt of payment, and upon completion, allows the Company to realize revenue under its revenue recognition policy.
With respect to the Company’s offered financial accounting, bookkeeping and/or real property management consulting services, to date no contracts have been entered into, and thus no reportable revenues have resulted for the fiscal years ended December 31, 2021 and 2020 or for the six months ended June 30, 2022.
Identifying the Performance Obligations in Our Sales Contracts
In analyzing the Company’s sales contracts, the Company’s policy is to identify the distinct performance obligations in a sales contract arrangement. In determining the Company’s performance obligations under its sales contracts, the Company considers that the terms and conditions of sales are explicitly outlined in its sales contracts and are so distinct and identifiable within the context of each sales contract, and so are not integrated with other goods, or constitute a modification or customization of other goods in the Company’s contracts, or are highly dependent or highly integrated with other goods in the Company’s sales contracts. Thus, the Company’s performance obligations are singularly related to its promise to provide the hempSMART™ and cDistro products upon receipt of payment. The Company offers an assurance warranty on its hempSMART™ and cDistro products that allows a customer to return any hempSMART™ and cDistro products within 30 days if not satisfied for any reason. Assurance warranties are not identifiable performance obligations since they may be elected at the whim of the customer for any reason. However, the Company does account for returns of purchase prices, if made.
Product Sales
Revenue from product sales, including delivery fees, is recognized when (1) an order is placed by the customer; (2) the price is fixed and determinable when the order is placed; (3) the customer is required to and concurrently pays for the product upon order; and (4) the product is shipped. The evaluation of the Company’s recognition of revenue after the adoption of ASC Topic 606 did not include any judgments or changes to judgments that affected the Company’s reporting of revenues since the Company’s product sales, both pre and post adoption of ASC Topic 606 were evaluated using the same standards as noted above, reflecting revenue recognition upon order, payment and shipment, which all occurs concurrently when the order is placed and paid for by the customer, and the product is shipped. Further, given the facts that (1) the Company’s customers exercise discretion in determining the timing of when they place their product order and (2) the price negotiated in the Company’s product sales is fixed and determinable at the time the customer places the order, and there is no delay in shipment, the Company is of the opinion that its product sales do not indicate or involve any significant customer financing that would materially change the amount of revenue recognized under the sales transaction, or would otherwise contain a significant financing component for the Company or the customer under ASC Topic 606.
| 11 |
Consulting Services
The Company also offers professional services for financial accounting, bookkeeping and/or real property management consulting services based on consulting agreements. As of the date of this filing, the Company has not entered into any contracts for any financial accounting, bookkeeping and/or real property management consulting services that have generated reportable revenues as of the years ended December 31, 2021 or 2020 or the six months ended June 30, 2022. If and when the Company provides these professional services, it would intend and expect the arrangements to be entered into on an hourly fixed fee basis.
For hourly based fixed fee service contracts, the Company intends to utilize and rely upon the proportional performance method, which recognizes revenue as services are performed. Under this method, in order to determine the amount of revenue to be recognized, the Company will calculate the amount of completed work in comparison to the total services to be provided under the arrangement or deliverable. The Company only recognizes revenues as incurred and charges billable hours. Because the Company’s hourly fees for services are fixed and determinable and are only earned and recognized as revenue upon actual performance, the Company is of the opinion that such arrangements are not an indicator of a vendor or customer based significant financing that would materially change the amount of revenue the Company recognizes under the contract or would otherwise contain a significant financing component under ASC Topic 606.
The Company determined that upon adoption of ASC Topic 606 there were no adjustments converting from ASC 605 to ASC Topic 606 because product sales revenue is recognized upon customer order, payment and shipment, which occurs concurrently, and the Company’s consulting services offered are fixed and determinable and are only earned and recognized as revenue upon actual performance.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of the Company’s stock, stock-based compensation, fair values relating to derivative liabilities, debt discounts and the valuation allowance related to deferred tax assets. Actual results may differ from these estimates.
Cash
The Company considers cash to consist of cash on hand and temporary investments having an original maturity of 90 days or less that are readily convertible into cash.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to a concentration of credit risk are cash and accounts receivable. Occasionally, the Company’s cash in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.
Accounts Receivable
Trade receivables are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis. Thus, trade receivables do not bear interest. Trade accounts receivable are periodically evaluated for collectability based on past credit history with customers and their current financial condition.
Allowance for Doubtful Accounts
Any charges to the allowance for doubtful accounts
on accounts receivable are charged to operations in amounts sufficient to maintain the allowance for uncollectible accounts at a level
management believes is adequate to cover any probable losses. Management determines the adequacy of the allowance based on historical
write-off percentages and the current status of accounts receivable. Accounts receivable are charged off against the allowance when collectability
is determined to be permanently impaired. As of June 30, 2022 and December 31, 2021, allowance for doubtful accounts was $
Inventories
Inventories are stated at the lower of cost or market with cost being determined on a first-in, first-out (FIFO) basis. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. During the periods presented, there were no inventory write-downs.
Cost of Sales
Cost of sales is comprised of cost of product sold, packaging, and shipping costs. We experience substantial variations in our gross margins since our primary operating subsidiary, cDistro, obtains significant discounts from vendors for paying invoices early.
| 12 |
The Company accounts for the stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of ASC 718-10-30. Pursuant to ASC 718-10-30-6, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.
If the Company is a newly formed corporation or shares of the Company are thinly traded, the use of share prices established in the Company’s most recent private placement based on sales to third parties or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial Option Model option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments. The expected life of options and similar instruments represents the period of time the options and/or similar instruments are expected to be outstanding. Pursuant to ASC 718-10-50-2(f)(2)(i). the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments. Pursuant to ASC 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term equal the quotient of the vesting term plus the original contractual term divided by two if (i) a company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) a company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) a company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as it does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. |
| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public entity that uses the calculated value method shall disclose the reasons why it is not practicable for it to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. | |
| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments. | |
| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments. |
| 13 |
Generally, all forms of share-based payments, including stock options, warrants, restricted stock and stock appreciation rights are measured at their fair value on the grant date of the award based on the estimated number of awards that are ultimately expected to vest.
The expense resulting from share-based payments is recorded in general and administrative expense in the statements of operations.
Stock-Based Compensation - Non Employees
Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation: Improvement to Nonemployee Share-Based Payment Accounting (“Topic 718”s). The ASU supersedes ASC 505-50, Equity-Based Payment to Non-Employment, and expands the scope of the Topic 718 to include stock-based payments granted to non-employees. Under the new guidance, the measurement date and performance and vesting conditions for stock-based payments to non-employees are aligned with those of employees, most notably aligning the award measurement date with the grant date of an award. The new guidance is required to be adopted using the modified retrospective transition approach. The Company adopted the new guidance effective January 1, 2019, and the adoption did not have a material impact on its financial statements and related disclosures.
The fair value of share options and similar instruments is estimated on the date of grant using a Binomial option-pricing valuation model. The ranges of assumptions for inputs are as follows:
| • | Expected term of share options and similar instruments: Pursuant to ASC 718-10-50-2(f)(2)(i), the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and the holder’s expected exercise behavior into the fair value (or calculated value) of the instruments. The Company uses historical data to estimate the holder’s expected exercise behavior. If a company is a newly formed corporation or shares of such company are thinly traded, the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as such company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term. | |
| • | Expected volatility of the entity’s shares and the method used to estimate it. Pursuant to ASC 718-10-50-2(f)(2)(ii), a thinly-traded or non-public entity that uses the calculated value method shall disclose the reasons why it is not practicable for the company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index. The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility. If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market. | |
| • | Expected annual rate of quarterly dividends. An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments. | |
| • | Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments. |
Basic earnings per share are calculated by dividing net income (loss) by the weighted average number of shares of the Company’s common stock outstanding during the period. “Diluted earnings per share” reflects the potential dilution that could occur if the Company’s share-based awards and convertible securities were exercised or converted into common stock. The dilutive effect of the Company’s share-based awards is computed using the treasury stock method, which assumes all share-based awards are exercised and the hypothetical proceeds from exercise are used to purchase common stock at the average market price during the period. The incremental shares (difference between shares assumed to be issued versus purchased), to the extent they would have been dilutive, are included in the denominator of the diluted earnings per share calculation. The dilutive effect of the Company’s convertible preferred stock and convertible debentures is computed using the if-converted method, which assumes conversion at the beginning of the year.
Property and Equipment
Property and equipment are stated at cost.
When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and
the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and
equipment are recorded at cost and depreciated using the
| 14 |
Goodwill and Intangible Assets
Goodwill is carried at cost and is not amortized. The Company tests goodwill for impairment on an annual basis at the end of each fiscal year, relying on a number of factors including operating results, business plans, economic projections, anticipated future cash flows and marketplace data. Company management uses its judgment in assessing whether goodwill has become impaired between annual impairment tests according to specifications set forth in ASC 350.
The Company recognizes an acquired intangible asset apart from goodwill whenever the intangible asset arises from contractual or other legal rights, or when it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized over their useful lives. Impairment losses are recognized if the carrying amount of an intangible asset subject to amortization is not recoverable from expected future cash flows and its carrying amount exceeds its fair value. The following table summarizes the Company’s intangible assets:
| June 30, 2022 | December 31, 2021 | |||||||
| Trademarks (estimated 5-year life) | $ | $ | ||||||
| Licenses (estimated 10-year life) | ||||||||
| Customer Relationships (estimated 5-year life) | ||||||||
| Intangible assets, gross | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Intangible assets, net | $ | $ | ||||||
We evaluate long-lived assets, including intangible assets and goodwill for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Upon such an occurrence, recoverability of assets to be held and used is measured by comparing the carrying amount of an asset to forecasted undiscounted net cash flows expected to be generated by the asset. If the carrying amount of the asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. For long-lived assets held for sale, assets are written down to fair value, less cost to sell. Fair value is determined based on discounted cash flows, appraised values or management's estimates, depending upon the nature of the assets. The Company completed an evaluation of goodwill and intangible assets at June 30, 2022 and determined that no impairment was necessary.
Investments
The Company follows ASC subtopic 321-10, Investments-Equity Securities (“ASC 321-10”) which requires the accounting for an equity security to be measured at fair value with changes in unrealized gains and losses are included in current period operations. Where an equity security is without a readily determinable fair value, the Company may elect to estimate its fair value at cost minus impairment plus or minus changes resulting from observable price changes (See Note 6).
Derivative Financial Instruments
The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) provide the Company with a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement) providing that such contracts are indexed to the Company's own stock. The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside the Company’s control) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). The Company assesses classification of its common stock purchase warrants and other free-standing derivatives at each reporting date to determine whether a change in classification between equity and liabilities is required.
The Company’s free-standing derivatives consisted of conversion options embedded within its issued convertible debt and warrants with anti-dilutive (reset) provisions. The Company evaluated these derivatives to assess their proper classification in the balance sheet using the applicable classification criteria enumerated under GAAP. The Company determined that certain conversion and exercise options do not contain fixed settlement provisions. The convertible notes contain a conversion feature and warrants have a reset provision such that the Company could not ensure it would have adequate authorized shares to meet all possible conversion demands. As such, the Company was required to record the conversion feature and the reset provision which does not have fixed settlement provisions as liabilities and mark to market all such derivatives to fair value at the end of each reporting period.
The Company has adopted a sequencing policy that reclassifies contracts (from equity to assets or liabilities) with the most recent inception date first. Thus, any available shares are allocated first to contracts with the most recent inception dates.
Fair Value of Financial Instruments
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2022 and December 31, 2021. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash and accounts payable. Fair values were assumed to approximate carrying values for cash, accounts payables and short-term notes because they are short term in nature.
Advertising
The Company follows the policy of charging
the costs of advertising to expense as incurred. The Company charged to operations $
Segment Information
ASC subtopic Segment Reporting 280-10 ("ASC 280-10") establishes standards for reporting information regarding operating segments in annual financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. ASC 280-10 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions how to allocate resources and assess performance. The information disclosed herein materially represents all of the financial information related to the Company's principal operating segments, hempSMART and cDistro.
| 15 |
The following table represents the Company’s hempSMART business for the six months ended June 30, 2022 and 2021:
hempSMART
STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
| For the Three Months Ended |
6 Months Ended |
For the Three Months Ended |
6 Months Ended | |||||||||||||||||||||
| March 31, 2022 | June 30, 2022 | June 30, 2022 | March 31, 2021 | June 30, 2021 | June 30, 2021 | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of Goods Sold | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Stock Based Compensation | ||||||||||||||||||||||||
| Selling and Marketing | ||||||||||||||||||||||||
| Payroll and Related expenses | ||||||||||||||||||||||||
| Depreciation Expense | ||||||||||||||||||||||||
| General and Admin Expenses | ||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||
| Net Loss from Operations | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||||
cDistro Inc.
STATEMENT OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
| For the Three Months Ended |
6 Months Ended |
For the Three Months Ended |
6 Months Ended | |||||||||||||||||||||
| March 31, 2022 | June 30, 2022 | June 30, 2022 | March 31, 2021 | June 30, 2021 | June 30, 2021 | |||||||||||||||||||
| Revenues | $ | $ | $ | $ | $ | $ | ||||||||||||||||||
| Cost of Goods Sold | ||||||||||||||||||||||||
| Gross Profit | ||||||||||||||||||||||||
| Expense | ||||||||||||||||||||||||
| Stock Based Compensation | ||||||||||||||||||||||||
| Selling and Marketing | ||||||||||||||||||||||||
| Payroll and Related expenses | ||||||||||||||||||||||||
| Depreciation and amortization Expense | ||||||||||||||||||||||||
| General and Admin Expenses | ||||||||||||||||||||||||
| Total Expense | ||||||||||||||||||||||||
| Net Income (Loss) from Operations | $ | ( |
) | $ | $ | ( |
) | $ | $ | $ | ||||||||||||||
| 16 |
Income Taxes
Deferred income tax assets and liabilities are determined based on the estimated future tax effects of net operating loss and credit carry forwards and temporary differences between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than not that these deferred income tax assets will be realized.
The Company recognizes a tax benefit from an
uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities
based on the technical merits of the position. The tax benefits recognized in the condensed consolidated financial statements from such
a position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
As of June 30, 2022 and 2021, the Company has
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, “Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815 - 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative which aims to reduce unnecessary complexity in GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its financial statements.
Recently Issued Accounting Pronouncements Adopted
Accounting for Income Taxes In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The amendments in ASU 2019-12 simplify the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, Income Taxes. The amendments also improve consistent application of and simplify U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
Equity Securities, Equity-method Investments and Certain Derivatives In January 2020, the FASB issued ASU 2020-01, Investments-Equity Securities (Topic 321), Investments-Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)-Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The guidance provides clarification of the interaction of rules for equity securities, the equity method of accounting and forward contracts and purchase options on certain types of securities. ASU 2020-01 became effective for the Company in the first quarter of 2021. The adoption of this standard did not have any impact on the Company’s condensed consolidated financial statements.
NOTE 4 - OPERATING LEASE
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This ASU requires lessees to recognize a lease liability, on a discounted basis, and a right-of-use asset for substantially all leases, as well as additional disclosures regarding leasing arrangements. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842), which provides an optional transition method of applying the new lease standard. ASU 2018-11, Topic 842 can be applied using either a modified retrospective approach at the beginning of the earliest period presented, or as permitted by ASU 2018-11, at the beginning of the period in which it is adopted.
We adopted this standard using a modified retrospective approach on January 1, 2019. The modified retrospective approach includes a number of optional practical expedients relating to the identification and classification of leases that commenced before the adoption date; initial direct costs for leases that commenced before the adoption date; and the ability to use hindsight in evaluating lessee options to extend or terminate a lease or to purchase the underlying asset.
| 17 |
The Company elected the package of practical expedients permitted under ASU 2018-11, Leases, allowing it to account for its existing operating lease that commenced before the adoption date as an operating lease under the new guidance without reassessing (i) whether the contract contains a lease; (ii) the classification of the lease; or, (iii) the accounting for indirect costs as defined in ASC 842.
On May 31, 2021, the
Company’s operating lease for its office space located at 1340 West Valley Parkway, Suite 205, Escondido, CA 92029 expired
and, at that time, the Company fully amortized its right-of-use asset for such lease. On June 1, 2021, the Company entered into an
office accommodation agreement whereby it may access a shared office space located at 633 West Fifth Street, Suite 2826, Los
Angeles, CA 90071 on a month-to-month basis over a one-year term for a fee of $
The Company determined under ASC 2018-11, Leases (Topic 842), due to the short-term nature of the office accommodation agreement, that such agreement met the criteria of ASC 842-20-25-2 and as such it is not necessary to capitalize the office accommodation agreement and fees will be recognized on a monthly straight-line basis. The adoption of this guidance resulted in no significant impact to the Company’s results of operations or cash flows.
NOTE 5 - PROPERTY, MACHINERY AND EQUIPMENT
Property and equipment as of June 30, 2022 and December 31, 2021 is summarized as follows:
June 30, 2022 | December 31, 2021 | |||||||
| Computer equipment | $ | $ | ||||||
| Furniture and fixtures | ||||||||
| Machinery | ||||||||
| Subtotal | ||||||||
| Less: accumulated depreciation | ( | ) | <||||||